The G-20 finance officials’ meeting in Chengdu, China, in advance of the September leaders’ summit, offered scant regional currency and stock market balm, as participants agreed to coordinate and strengthen fiscal, monetary and structural policies without taking specific action. Aides hinted that detailed initiatives could come in the coming months, but discouraged any comparison with 2009’s post-crisis emergency package that represented the collective response peak to global economic sluggishness.

China launched its massive credit and infrastructure stimulus then, and Finance Minister Lou Jiwei urged concrete steps in Chengdu after February’s previous G-20 session warned of looming recession. US Treasury Secretary Jack Lew in particular rebuffed such moves with assurances the American economy was in “good shape.”

Europe’s presence was subdued as EU and UK delegates continued to mull Brexit fallout, and Japan’s central bank denied consideration of “helicopter money” as a next step in Abenomics, where liquidity expansion would go for budget purposes in the name of escaping deflation. Indonesia’s team summarized the outcome as it pointed to future promises that carry no obligations outside the current agreement to refrain from competitive devaluation.

China’s upper hand

Host China was the main winner as it welcomed  counterparts to a scenic setting that may encourage tourism with the yuan’s dip to 6.7/dollar, and managed to deflect early year concern over macro-policy and banking system direction despite lingering woes. It also spurned outside demands to cut overcapacity in steel and other sectors, with specific targets left to a later dedicated OECD gathering.

Shanghai has been Asia’s worst performing stock exchange, with a 15% loss through mid-July, as investors were not comforted with second quarter’s 6.7% growth composition and financial sector indicators. Fixed asset allocation slowed to single digits and the private sector contribution rose less than 3%, while property investment recovered at double that pace as the government slashed inventory and reopened the credit spigots.

Retail sales were steady, but imports and exports both declined in dollar terms in the first half and FDI was up just 5%. Producer prices slipped 3% and consumer inflation stayed 2% in June. The over 2-year capital outflow record improved to $65 billion in Q2 and reserves increased $20 billion to $3.2 trillion, according to the Institute for International Finance.

However, analysts criticize data disclosure since the agreement to follow the IMF’s statistical methodology. Off-balance sheet exposure is unknown as the central bank recently applied “window guidance” to discourage bank short yuan positions in the local and Hong-Kong/Singapore markets.

Beijing and other G-20 members express newfound willingness to pull the fiscal lever after years of emphasizing “discipline,” and officials estimate this year’s deficit in the 5% range on $30 billion in railway and other programs. Loose monetary policy continues with bank loans up almost 15% on an annual basis, and outstripping GDP at $16 trillion.

In recent months mortgage lines regained favor as corporate credit was just 4% higher from January-May, according to Citigroup. State-owned companies have also been shut out of the bond market at home or abroad, with 3:1 negative vs. positive rating actions reported by Standard and Poor’s. Steel group Dongbei had another default in June, and over 60% of issues from the sector due before end-2016 have “fragile liquidity positions,” according to Fitch Ratings, as Premier Li reiterated broad overcapacity reduction plans in Chengdu.

1MDB’s aroma in Malaysia

Anti-money laundering and tax evasion solidarity was also cited in the G-20 communiqué, with Malaysia’s 1MDB now a headline cross-border case. In the US, the attorney general announced an investigation into an alleged $1 billion fraud and diversion by Prime Minister Razak’s family members and close allies, and the Justice Department and Securities and Exchange Commission are also probing Goldman Sachs for possible malfeasance as the fund’s bond underwriter.

Stocks took the news in stride and remained up 5% after a surprise 25 basis point interest rate cut, which at the same time lowered the ringgit to 4/dollar. The GDP growth forecast is 4%, but domestic demand as reflected in motor vehicle sales and credit has recently stumbled along with leadership innocence declarations.

Gary N. Kleiman is an emerging markets specialist who runs Kleiman International in Washington, D.C.

Gary Kleiman

Pioneer and recognized expert in the field of global emerging economies and financial markets. Founder of first consulting firm dedicated to providing independent analysis and advice to public and private sector clients in 1987, and research coverage and firsthand experience covers 75 countries in all developing regions. Advisor on financial vulnerability issues, risk management, portfolio allocation, and financial sector and capital markets strategy and development.

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